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Wednesday, June 17, 2009 There's no sustained bull market unless one of two things happens... Gold in vending machines and at the post office? Need money? Head to Washington... Paul van Eeden on the actual money supply...and more! --------------------- Special Offer --------------------------- Meet Mr. X... He Could Make You an Extra $1,156 Per Day We were intimidated by his bold trades... Then we realized he could have made you $34,680 in just the last 30 days... Your only chance ENDS TOMORROW at midnight... Get behind the mystery here! --------------------------------------------------------------- A Golden Vending Machine by Bill Bonner London, England The Dow fell another 107 points yesterday. Oil held steady at $70. The dollar fell to $1.38. And gold rose $4 to 932. What if the rally is over? Could be...it began on March 9th. That makes it more than three months old. Most likely, it will continue through the summer. But who knows? The important thing to remember is this: There can be no major, sustained bull market without one of two things happening. Either the mistakes of the Bubble Epoque must be cleared away...allowing for a new era of genuine growth and real prosperity. At best, this would take a few years to achieve. Just imagine how long it will take to restructure GM into a profit-making business again. Just imagine how long it will take consumers to pay down their debts so they can begin to spend again. Just imagine how long it will take to save enough money to build new factories...and convert shopping malls to warehouses and apartment complexes... And just imagine how long it will take with the feds fighting it tooth and nail. At least a decade! Or people must be willing to go even further into debt...thus increasing the errors of the debt-soaked boom. Anything is possible. But here at The Daily Reckoning we think the economy is already saturated with debt. It can't absorb more. Besides, the financial industry is no longer capable of pushing debt on the public. That machine is broken. The bubble in finance exploded when Lehman Bros. went down. Once a bubble blows up, it can't be reflated. And so far, the feds' efforts to reflate the bubble in consumer finance have caused a return of speculation in oil, commodities, and emerging markets. There is no sign of consumer price inflation or expanding consumer credit. Instead, consumer credit is contracting. So don't expect a real bull market. Instead, let's move on...this just in: The Financial Times reports that a vending machine company is soon to install machines in Germany where you'll be able to buy gold as easily as buying a chocolate bar. There's one machine already in the Frankfurt Airport, where for 30 euros you can buy a 1-gram wafer of gold. Already, in Switzerland, you can buy gold in the post office. (As an aside, our intrepid correspondent Byron King has an interesting way you can buy gold in the states - for a penny per ounce.) What do these yodelers and sausage eaters know that we don't? Germany was required to pay reparations after WWI. The amount was about $1.121 trillion in today's money. In gold. She had no choice. She had to turn over her real money - gold - to the victorious French and English. Thus, she had no real money left in the domestic economy. What could she do? Germany printed up marks...not backed by gold and experienced hyperinflation, up close, in the '20s. Coming not long after the debacle of WWI and the Treaty of Versailles, it not only destroyed the economy...it also wiped out savers and destroyed Germans' residual faith in their own sausages. Soon after, there were armed gangs of communists and national socialists fighting for control of the streets. And we all know how that turned out... So, back to the U.S.A.: The United States has entered the third and final stage in the life and death of a great country. America's history can be divided into three broad stages. The first stage was industrialization. This is what took the United States from a marginal nation of settlers, explorers, farmers, entrepreneurs and religious refugees to become the world's richest and most powerful country. The source of its wealth and power was its factories...and its people. The factories were the best in the world. And the people how labored in them were accustomed to hard work, saving, and self- discipline. There were no free lunches in America during this period. The fastest growing cities of the time were manufacturing centers - Chicago, Gary, Detroit, Pittsburg, and Birmingham. Thanks to its smokestacks and assembly lines, the US could make things better, cheaper and faster than any other country, with the possible exception of Germany before WWI and Japan after WWII. That is how the US became the world's largest creditor - by selling US-made goods to foreigners. And it's how the United States won WWI and WWII too. American factories could turn out more tanks, more planes, more guns and more butter than any other nation. And the United States had an abundant source of fuel too; "Texas Tea" they called it. After WWII America enjoyed its glory days. It was on top of the world...in practically every sense. The United States was #1. Let's stop here and go to the news: "When the recession is over, how will we know?" wonders Ian Mathias in today's issue of The 5 Min. Forecast. "Last month, we explored the idea of peaking initial unemployment claims being the canary in the coalmine for economic recovery. While it's worked in the past... we're not convinced. "Today, check out this D-list data point - Capacity Utilization. "It's a simple concept that's hard to track. Capacity utilization measures what percent of businesses are using existing capabilities. 100% marks an economy 'firing on all cylinders,' as the corporate catch-phrase goes. When consumer demand drops, so too does capacity utilization... and since 1970, it hasn't picked up until the worst is over. "Yesterday, capacity utilization in the US found a record low of 68.3%. The Federal Reserve said utilization fell another 0.7 percentage points from April to May, to the lowest score since at least 1967, when they started keeping track. Factory output is down 13.4% over the last year, the biggest drop since 1946." Our friend over at the newly revamped Richebächer Letter, Rob Parenteau, also keeps capacity utilization on his radar. For more insights on this data, and to find out how to protect yourself from an even bigger economic downturn, see here. And now...back to Bill's look at the U.S.A.: Nothing fails like success. The New Deal had fundamentally changed Americans' relationship to the state. Federal meddlers began playing a larger and larger role in the economic life of the country. Soon, American attitudes evolved to fit the circumstances. With the world's reserve currency...a huge lead over its competitors...and a government that promised to take care of its wants and needs, the US workforce relaxed. Gradually, it shifted from making things to buying them...while industry turned its focus from production to sales...and then, financing. Then, the United States entered the second stage: financialization. In this second stage, the center of gravity shifted from the wealth- producing factories to the financial centers - mainly Manhattan. Prices of real estate in New York soared. Wall Street came to be seen not merely as a place to invest the proceeds of honest toil...but a way to create wealth. The most ambitious college graduates turned from engineering and manufacturing first to sales and marketing and later to finance; because that's where the money was. At the peak, in the Bubble Epoch, 2003-2007, Wall Street was drawing in the world's leading scholars in mathematics and statistics... These people were creating the biggest debt bombs in history...exotic, complicated financial concoctions...that eventually blew up in their faces. Detroit went into a decline as early as the late '60s. GM continued to make cars, but it looked to financing as a way of make money. GMAC became the major source of GM's profits. Still mills along the Monongahela River began to rust in the '70s. Ships began to come to the US laden with goods in the '80s and '90s...and to go back empty. The US Fed tried to stimulate the US economy on several occasions, but it had a strange effect. It put more credit in the hands of US consumers - who used the money to buy goods from overseas. In effect, the US Fed was stimulating manufacturing in China! But in 2007-2008 the bubble in consumer debt blew up. GM went broke in May of '09. The financialization stage ended. In its place comes a new stage: politicization, the third and fatal phase of a great nation. Where is the money now? It took the train from Grand Central Station in Manhattan down to Union Station in Washington, DC. Want money? Ask Washington. It's pledged an amount equal to three times what it spent in WWII to the fight against deflation. Where is the power now? Just ask Chrysler bondholders; in the end it didn't matter what their contracts said...when the US government turned against them, their goose was cooked. The Obama Administration, owner of GM, now sets top salaries and determines what kind of cars the company will make. Washington also determines which businesses will be kept alive - AIG - and which will die - Lehman Bros. Now it's the politicians, not Wall Street, nor investors, who decide the allocation of big capital... And when ambitious young people buy a ticket to begin their careers, are they going to Milwaukee...to Manhattan...or to the lobbyists' mecca in Northern Virginia? Until tomorrow, Bill Bonner The Daily Reckoning P.S. There is just one day left to get yourself into the 'anti-stock market'...and the way this 'rally' is going, this offer is coming at the perfect time. Learn all about it here. --------------------- Special Offer --------------------------- Only 63 People Know Why These Six Tiny Companies Will Change the World... You're #64 - and about to become ultra-wealthy. This will go down in history as the "story of our era..." Most importantly, you'll be rich because you took decisive action in 2009. See the full report here. --------------------------------------------------------------- The Daily Reckoning PRESENTS: There is a lot of debate going on about the inflation rate. Are we in an inflationary or deflationary environment? What can we expect going forward? There are no obvious answers, partly because the debaters don't really know what money is, how to measure the money supply or how to calculate the inflation rate. Paul van Eeden explores... The Actual Money Supply by Paul van Eeden Toronto, Ontario On February 17, 2000, then Federal Reserve Board Chairman, Alan Greenspan, was answering a question from Congressman Ron Paul during a House of Representatives Committee on Financial Services hearing, when the following exchange took place. Mr. Greenspan: "Let me suggest to you that the monetary aggregates as we measure them are getting increasingly complex and difficult to integrate into a set of forecasts. "The problem we have is not that money is unimportant, but how we define it. By definition, all prices are indeed the ratio of exchange of a good for money. And what we seek is what that is. Our problem is, we used M1 at one point as the proxy for money, and it turned out to be very difficult as an indicator of any financial state. We then went to M2 and had a similar problem. We have never done it with M3 per se, because it largely reflects the extent of the expansion of the banking industry, and when, in effect, banks expand, in and of itself it doesn't tell you terribly much about what the real money is. "So our problem is not that we do not believe in sound money; we do. We very much believe that if you have a debased currency that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money. We have had trouble ferreting out proxies for that for a number of years. And the standard we employ is whether it gives us a good forward indicator of the direction of finance and the economy. Regrettably none of those that we have been able to develop, including MZM, have done that. That does not mean that we think that money is irrelevant; it means that we think that our measures of money have been inadequate and as a consequence of that we, as I have mentioned previously, have downgraded the use of the monetary aggregates for monetary policy purposes until we are able to find a more stable proxy for what we believe is the underlying money in the economy." "Inflation and deflation are monetary phenomena and the recent decline in prices has only lead to confusion and further obfuscation of what is really going on." Dr. Paul: "So it is hard to manage something you can't define." Mr. Greenspan: "It is not possible to manage something you cannot define." Here we have possibly the most influential and powerful banker in the world, who is in charge of managing the most widely used money in the world - the U.S. dollar - telling us not only that he doesn't know what money is, or how to measure how much of it there is, but admitting that it's impossible to manage the money supply precisely because they have not yet figured out what it is or how to measure how much of it there is. For something we use every day and that is an integral part of our lives, it is remarkable how little we know about money. When the money supply increases (inflation) money loses value (prices rise). Because the money supply is almost always increasing (inflation), and therefore decreasing the value of money, it means that our standard of living is eroded over time if our income is fixed, or not rising as fast as the inflation rate (the rate of increase in the money supply). Yet there is no credible measure of the inflation rate. I have been searching for an answer to the actual inflation rate for more than a decade and there was none that I felt was accurate enough, so I had to design my own. Actual Money Supply (AMS) is a tool that I created to measure the money supply in the United States and therefore the actual monetary inflation rate. The chart below is always the most recent one I have and is updated as data becomes available. Because the monthly, year-over-year data depicted in the chart is so volatile I added a rolling 12-month average of the Actual Inflation Rate to the chart. The rolling 12-month average inflation rate is itself still quite volatile, but much less so than the actual monthly data. It is interesting to note that the average rolling 12-month inflation rate averages 8.25% for the past 15 months. To put that in context, the average inflation rate from 1970 to 1979 was 8.32%. We are, absolutely, in a highly inflationary environment. Deflation is not only unlikely given the structure of the US banking system, but nowhere to be seen in the data either. Demand destruction has had a severe impact on the prices of many goods and services, but that should not be confused with deflation. Inflation and deflation are monetary phenomena and the recent decline in prices has only lead to confusion and further obfuscation of what is really going on. Monetary inflation is currently mitigating the price declines we are witnessing, meaning those prices that are declining would have declined much more were it not for the inflation, and will eventually cause prices to start rising again. Our greatest concern should not be with the current falling prices of goods and services, but with the rate at which they will rise in the future vis-à-vis our capital and income. I suspect there are very few people out there whose income and investments are keeping up with the inflation rate, which means their wealth is eroding in real terms. I have also been aggregating and calculating similar money supply and inflation data for Canada and found that the Canadian dollar's inflation rates for 2007 and 2008 were much higher than the inflation rates of US dollar. However, the average inflation rates for 2009 thus far are exactly the opposite. Canada's inflation rate is falling while that of the US is remaining steady above 8%. Year US CAD 2007 7.93% 9.55% 2008 8.31% 10.23% 2009 8.48% 6.89% For those interested in gold, my fair value of gold for 2008 was $763 an ounce. Using the average of 2008 and 2009's inflation rates for the U.S. dollar, and gold's inflation rate for 2008, I come up with an approximate average value for gold of $815 for 2009. Please note that this is an estimate of the average value for the year, and not a year- end estimate. Clearly the gold price is well above $815 an ounce, and has been so for quite some time. The macro economic environment has probably never been so obviously in favor of gold and it is my belief that the market has already priced much of this into the gold price. While I fully recognize gold's lure at these times, and the probability that the gold price could still increase quite substantially, I remain cautious about gold. Recall that investors who bought gold when it was grossly over- priced during 1979 and 1980 and then forgot to sell, suffered severe losses. I would personally prefer gold to sell down to around $800 an ounce, where I know it represents good value, than buy gold at over-valued prices and hope that it keeps going up. Regards, Paul van Eeden for The Daily Reckoning Editor's Note: You can catch Paul van Eeden at this year's Agora Financial Investment Symposium in Vancouver, British Columbia. This year's event promises to be the best on record, and it is already over 70% sold out...so secure your ticket now. Get all the information you need here: Agora Financial Investment Symposium, July 21-24 Paul van Eeden is president of private holding and investment company Cranberry Capital Inc., and is well known for his work on the relationship between the price of gold and currency markets. Originally from South Africa, and having been intimately involved in the financing and evaluation of resource companies, he has an insider's understanding of mineral exploration. Van Eeden is a frequent speaker at investment conferences and a regular guest on radio and television. Learn more here. ----------------------- Special Offer ------------------------- Without any effort, you can legally sneak onto the "payroll" of 1,000+ of America's best companies... Collect a regular "Plan B Pension" check up to every 12 days, with nonstop annual incomes as high as $120,000 or more... 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